Despite 90% Move Deere Stock Has More Room To Grow

Despite a 90% rise since the March 23 lows of this year, at the current price of around $210 per share we believe Deere & Company’s stock (NYSE: DE) looks attractive and it has more room for growth. DE stock has moved from $111 to $210 off the recent bottom compared to the S&P which moved 55%, with the resumption of economic activities as lockdowns are gradually lifted. DE stock has not only fully recovered to the levels it was at before the drop in February due to the coronavirus outbreak becoming a pandemic, it is now trading at 19% above the pre-crisis levels. Furthermore, DE stock is also up 40% from levels seen in early 2018.

Some of the 40% rise of the last 2 years is justified by the roughly 32% growth seen in Deere’s revenues from 2017 to 2019. Also, the company managed to expand its Net Margins by 14% from 7.3% to 8.3%, which translated into a 52% growth in earnings. However, its P/E Multiple has contracted. We believe the stock is likely to see more upside despite the recent uptick and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 40% Change in Deere Stock between 2017 and now?‘, has the underlying numbers.

Deere’s P/E multiple changed from 22x in 2017 to 17x in 2019. While the company’s P/E is 20x now, there is a potential upside when the current P/E is compared to levels seen in the past years, P/E of 22x at the end of 2017.

So what’s the likely trigger and timing for further upside?

The global spread of Coronavirus has meant a decline in economic growth, and the construction sector in particular has been one of the worst hit sectors. Deere’s equipment is designed to cater to two primary sectors – Agriculture and Construction. Given the decline in overall construction, the company saw a 27% plunge in segment sales, while Agriculture & Turf segment fared better with a sales decline of a mere 4% in Q3 fiscal 2020 (fiscal ends in October). The company’s management in its latest quarterly earnings conference call provided a guidance of a 10% decline in Agriculture & Turf and a 25% decline for Construction & Forestry segment in the current fiscal year.

However, the decline in 2020 sales is more or less expected for several businesses, including Deere, and it is likely priced in the stock as well. Investors are willing to look at earnings growth beyond 2020, and Deere appears to be well positioned to post steady earnings growth. The company’s planned production has resulted in a lower inventory position, which should bode well for 2021, especially given that the farm equipment fleet continues to age.

Deere’s focus on precision agriculture provides an edge over competitors. There are several variables involved in farming, including weather, soil, seed placement, and fertilizers to name a few. Deere’s equipment provides data-driven technology helping the farmers to collect data across multiple variables and maximize crop yield. While the US is gaining on precision farming, the scope is much higher globally. Roughly 30% to 50% of farms with yields over 180 bushels per acre adopt to precision farming. The number drops to 17% for farms with yields under 140 bushels per acre (data published in 2018). ^[1]

Overall, we believe that Deere will likely see steady revenue and earnings growth over the coming years, and the stock trading at just 20x its trailing earnings, and 20x its fiscal 2021 expected earnings appears to be an attractive level for investors wiling to invest for the long-term.

Looking at the broader economy, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

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1. Farming: There’s an App for That, National Geographic [↩]